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How do people and companies avoid paying taxes?

Dec 8th 2013, 23:50by M.V. | NEW YORK

IT IS said that nothing in this world is certain except for death and taxes. For those with clever accountants, however, the latter can be kept to a minimum. Individuals have various ways to avoid tax legally by using structured tax shelters or changing their place of residence. Tax evasion is a different matter, treated as a criminal offence in many countries (though famously dealt with more leniently in Switzerland). The smartest evaders use a combination of bank accounts, shell companies, trusts and foundations—often fronted by nominees—in one or more offshore financial centres. Corporate tax avoidance is a greyer legal area. Companies naturally push the envelope, often betting that the authorities will have neither the wit nor the resources to confront them over their tax-minimisation strategies—or that governments will accept less tax in return for investment by "mobile capital".

Denis Healey, a former British finance minister, once described the difference between tax evasion and avoidance as "the thickness of a prison wall". Both grew in line with financial globalisation in the late 20th century. Evasion became easier with the explosion of tax havens, which was tacitly approved by rich countries (especially Britain) that saw them as useful adjuncts to their own financial centres. Today the world has between 50 and 60 tax havens, some of them more accurately described as "secrecy jurisdictions". Not all are offshore: American states such as Delaware and Nevada peddle corporate secrecy. Multinationals, meanwhile, have found increasingly ingenious ways to exploit loopholes in cross-border tax rules, which were designed for an earlier age, in order to reduce their taxes. International and bilateral tax agreements that were designed to avoid double taxation can be gamed to produce double non-taxation. Companies such as Apple have been able to redefine much of their profit as stateless.

The pushback against such ruses began in the late 1990s, when the Organisation for Economic Co-operation and Development (OECD), a rich-country forum, declared war on "harmful tax competition". It has waxed and waned since then, reaching a new level of intensity since 2008 as cash-strapped countries, both rich and poor, have fought harder to claw back lost tax revenues—witness America's assault on Swiss banks. Tax havens are under intense pressure to exchange more information on clients with their home countries. The world appears to be moving towards a system of automatic exchange of data, though there are many bumps to iron out. Some countries are resisting, citing a conflict with their privacy laws. Others complain that they are being bullied into providing data without a guarantee of reciprocation from America and other large economies. Still, life has clearly got a lot harder over the past few years for individuals looking to dodge their tax obligations, and is likely to get tougher still.

Reform of the international rules for companies will prove trickier. Some countries have acted unilaterally, for instance strengthening anti-avoidance laws. But only a truly multilateral solution will work. At the urging of the G20, the OECD is working on a plan to tackle the myriad ways that multinationals massage down their tax bills, including through the use of hybrid securities and the deliberate mispricing of intra-company transactions. However, it is too much to expect the closure of all the loopholes, and new ones are sure to open up. Rich-world governments have long tacitly encouraged certain types of avoidance for fear of otherwise being branded uncompetitive and turning off big investors. That is likely to continue, whatever the political rhetoric or the real reasons why multinationals choose to put operations in one country rather than another, which often have little to do with tax.